Administration, SMSF

Court can provide bankruptcy relief

SMSF bankruptcy court application

Recent court cases have revealed a potential course of action for SMSF members confronting bankruptcy that does not require the closure of their fund.

SMSF members facing bankruptcy have the potential to seek permission from the Federal Court to retain their roles as directors of an SMSF corporate trustee, provided the fund’s administration remains in good standing, according to an SMSF legal expert.

“Traditionally with bankruptcy there was really only two choices: if the member of an SMSF went bankrupt, you could cease to be a trustee of that fund and get a small APRA (Australian Prudential Regulation Authority) fund by appointing an approved trustee or you could roll out to a large APRA fund,” DBA Lawyers principal Dan Butler said during a recent webinar hosted by the firm.

“However, in recent times there’s been another option,” he added, noting seeking approval from the Federal Court to maintain directorship of an SMSF corporate trustee had been used as an alternative to the usual options.

To illustrate his point, Butler cited details from an earlier case to demonstrate how this principle might be applied. The case, Macalister [2021] FCA 1455, involved a couple who had set-up an SMSF in 2007 with Kircam Pty Ltd as the corporate trustee.

The Macalisters were unable to satisfy an existing debt and were subsequently declared bankrupt in 2020 and sought orders permitting them to continue to act as directors of Kircam.

“The Macalisters applied for permission under the Corporations Act and under the SIS (Superannuation Industry (Supervision)) Act. Importantly, the SMSF was all in order, the bankruptcy wasn’t related to their SMSF [and] the SMSF assets were in no way referable to the sale of the business,” Butler stated.

“They offered a condition to the leave of the court that there be an order to the effect that until such time as they are no longer disqualified from managing corporations, the company must not engage in any other activity apart from being a sole purpose trustee of the fund.

“And the Federal Court granted them permission to remain as directors of the company, so in this instance, [the Macalisters] were permitted to stay on as directors despite their bankruptcy [because] all was in order with the SMSF.”

Pointing to another recent case, Dessmann [2023] FCA 1019, in which the court did not allow a fund member to continue to act as the director of the corporate trustee, he highlighted key steps that should be taken to improve the outcome of a favourable court application.

“You have to seek an order as soon as possible for this bankrupt person. You also have to make sure the SMSF is not connected to the bankruptcy. You need to keep your lodgements up to speed as much as possible and apply under both the SIS Act and the Corps Act,” he noted.

“The trustee should be a sole purpose trustee company and the director should have no intention of managing any other company and offer conditions for that grant of leave similar to the Macalister case.”

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